Interviewer: Let’s review the differences between a Chapter 7 and a Chapter 13 bankruptcy.
Court Koehler: Chapter 7 is your classic straight bankruptcy, your liquidation bankruptcy. What they do is when you file for a Chapter 7, you create a fictional bankruptcy estate, and that includes everything that you own. The trustee will take assets that you have. I should say that generally speaking, people don’t actually lose anything in Chapter 7 bankruptcy because there are lots of exemptions that allow you to keep your clothes and your household goods and food and other possessions.
Chapter 7 Bankruptcy Exemptions Allow Most People to Retain Such Assets as Clothing and Household Goods
Usually you don’t actually end up having to sell anything. But if you had assets, they would take them and they would sell them and distribute those proceeds to your creditors, and then you would immediately receive a discharge. You get a fresh start right away.
The difference with the Chapter 13 bankruptcy is you’re saying I want to pay my debts back. I’m having trouble with the amount that’s due right now. I need to come up with a plan to lower that amount so that I can make payments on a monthly basis. Then, while I catch up over the period of years, I will pay back my debts over that period.
It’s not as drastic as a Chapter 7, and it allows you to address the back payments that you have and then move on from that point forward and get back on track.
What Is Debt Forgiveness?
Interviewer: Can you explain what debt forgiveness is?
In a Chapter 7 Bankruptcy, You Receive a Discharge within a Few Months and You Legally, Owe No More Money to Your Creditors
Court Koehler: When you file a bankruptcy, the prize at the end of the road that you want is your discharge. When you file a Chapter 7, the discharge happens pretty much right away. It takes only a few months. What the discharge does is it forgives you of all of your debt. You may have been $50,000 in debt or $100,000 in debt. When you get your discharge, all of that is forgiven. What that means you no longer owe money those creditors. The government says you’re done.
You Do Not Receive a Discharge in a Chapter 13 Bankruptcy until You Have Completed the Payment Plan
With a Chapter 13 plan, the discharge comes after you’ve completed the plan payments. Usually, what happens is you’re getting a discharge for your unsecured debts that are remaining at the end of the Chapter 13 payment.
For instance, let’s say enter Chapter 13 plan and the plan is $300 a month and you’re going to do it for three years. Let’s say you owe a few thousand dollars on your back mortgage payments and back car payments and then you’ve got the attorneys’ fees in there and the trustee’s fees. You pay money to the trustee for three years.
Over that time period, you pay off those debts. Whatever else you pay into that plan over that period will go to your unsecured debt, your credit cards and your medical bills. The trustee will distribute that to your unsecured creditors.
After the three years, you are then discharged from the rest of those unsecured debts just like you are in a Chapter 7. You may owe $50,000 in credit card payments, for instance. You go through your Chapter 13 plan, and those credit card payments get paid back just several thousand dollars or so, but then the rest of that money you don’t pay back. You receive a discharge at the end of your plan, as long as you completed it successfully.